597 St. Kilda Road, Melbourne Interim EY Property Advice Deaf Children Australia. 7 May 2014

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1 NOTICE The results of Ernst & Young s work, including the assumptions and qualifications made in preparing the report, are set out in the enclosed Extract of a broader EY Report ( Extract"). You should read the Extract in its entirety including the applicable scope of our work and any limitations. A reference to the Extract includes any part of the Extract. No further work has been undertaken by Ernst & Young since the date of the Extract to update it. It is reiterated that the Extract contained herein forms a constituent part of a broader EY Report. In conducting its work and preparing the Extract, Ernst & Young has acted in accordance with the instructions of Deaf Children Australia ( DCA ) as set out in its engagement agreement dated 3 December 2013, and, in doing so, has prepared the Extract for the benefit of the DCA, and has considered only the interests of the DCA. Ernst & Young has not been engaged to act, and has not acted, as advisor to any other party. Accordingly, Ernst & Young makes no representations as to the appropriateness, accuracy or completeness of the Extract for any other party's purposes. No reliance may be placed upon the Extract or any of its contents by any party other than the DCA ("Recipient") for any purpose and any Recipient receiving a copy of the Extract must make and rely on their own enquiries in relation to the issues to which the Extract relates, the contents of the Extract and all matters arising from or relating to or in any way connected with the Extract or its contents. Ernst & Young owes no duty of care to any Recipient of the Extract in respect of any use that the Recipient may make of the Extract. Ernst & Young disclaims all liability, and takes no responsibility, for any document issued by any other party in connection with the Extract. Ernst & Young disclaims all liability to any Extract for any loss or liability that the Recipient may suffer or incur arising from or relating to or in any way connected with the contents of the Extract, the provision of the Extract to the Recipient or the reliance upon the Extract by the Recipient. No claim or demand or any actions or proceedings may be brought against Ernst & Young by any Recipient arising from or connected with the contents of the Extract or the provision of the Extract to any Recipient. Ernst & Young will be released and forever discharged from any such claims, demands, actions or proceedings. To the fullest extent permitted by law, the Recipient of the Extract shall be liable for all claims, demands, actions, proceedings, costs, expenses, loss, damage and liability made against or brought against or incurred by Ernst & Young arising from or connected with the Extract, the contents of the Extract or the provision of the Extract to the Recipient.

2 597 St. Kilda Road, Melbourne Interim EY Property Advice Deaf Children Australia 7 May 2014

3 INTRODUCTION Deaf Children Australia ( DCA ) was established in 1862 to support the needs of families raising children who are deaf. The organisation responds to the individual needs of deaf children and their families, regardless of the degree of hearing loss, communication methods, educational settings, personal circumstances or additional disabilities. DCA is the freehold owner of a significant parcel of land, which is located at 597 St Kilda Road, in Melbourne, on the corner of St Kilda Road and High Street (the Site and/or Property ). A location map and aerial of the Site is provided as follows, and notably abuts landholdings owned by Wesley College to the north and east. Page 3

4 INTRODUCTION EY has been engaged by DCA to provide independent property advice regarding the long-term accommodation options and opportunities for the Site, having regard to a range of issues and considerations, which include: The significant association, sense of place and importance of the Site to the deaf community. The changing operating environment, structural change in the industry and economic landscape. All of these factors impact DCA s financial position. Appropriateness of the current improvements and buildings to the needs of the organisation: A number of the existing improvements have significant heritage attributes, which a) requires periodical maintenance and capital expenditure and b) restricts further development potential over the Site. The overall return from the Site. Utilisation of the Site. Restrictions on the Site and numerous leasehold interests (e.g. current lease arrangements with the Victorian College for the Deaf ( VCD ), the Department of Education and Early Childhood Development ( DEECD ) and other third parties); the current special use zoning and heritage overlays impacting the Site, and the impact of the Queen s Caveat over part of the Site. Indicative Quantity Surveyor cost estimates to refurbish the bluestone building are in excess of $10,000,000+. Approaches by numerous third parties in relation to a greater use of the Site. The recently proposed Contract of Sale with Wesley College in relation to part of the Site, which was rescinded due to an inability to resolve conditions precedent stipulated within the documentation between both parties. Page 4

5 Property and accommodations decisions should have a top down focus, which are congruent with the organisation s strategic aspirations, service delivery model and harness mission related outcomes. Decisions should be made to improve the overall commerciality of DCA and ensure the long-term economic sustainability and growth of the organisation. Page 5

6 Overview of the Site DCA LEGAL TITLE BOUNDARIES (TOTAL LAND AREA OF HECTARES) (Source: NearMap, 2014) Page 6

7 Overview of the Site DCA LEGAL TITLE BOUNDARIES (TOTAL LAND AREA OF HECTARES) PROTECTED BY QUEEN S CAVEAT (Source: NearMap, 2014) SUBJECT TO EXISTING LEASE WITH VCD / DEECD LEASE EXPIRES OCTOBER 2023 Page 7

8 DCA s current financial situation indicates that revenues are under pressure Revenue (2013 dollars) Donations (2013 dollars) $5,100,000 $600,000 $5,000,000 $550,000 $4,900,000 $4,800,000 $500,000 $4,700,000 $450,000 $4,600,000 $400,000 $4,500,000 $4,400,000 $350, $4,300, $300,000 *These figures and charts have been prepared by DCA and have not been verified by EY Page 8

9 The Board approved 3 deficit budgets in response to the Global Financial Crisis and management initiatives to generate additional income. Investment Income (2013 dollars) $950,000 $900,000 $850,000 $800,000 Cash Reserves $13,500,000 $12,500,000 $11,500,000 $750,000 $700,000 $650,000 $10,500,000 $9,500,000 $600,000 $550,000 $8,500, $500, $7,500,000 *These figures and charts have been prepared by DCA and have not been verified by EY Page 9

10 STEPS TAKEN BY DCA TO ADDRESS FINANCIAL CIRCUMSTANCES Investment in expanding fundraising with 3 year program Notwithstanding the Boards investment in fundraising activities, DCA has been unable to increase its percentage share of fundraising monies in a tough and highly competitive environment. Increasing competition between not for profits, hospitals and international charities has eroded the giving spirit that existed in the past. The 2013 Strategic Plan was conditional on the sale of the rear land to Wesley College DCA commitment to contribute $6m towards renovations. Commenced a Capital Appeal with an aim to raise the balance of required funds. $1.6m commitment to a new primary school. DCA commitment to extend the current VCD lease for a further 30 years. Inability to resolve conditions led to proposed sale being discontinued. Income generation & use of property The condition and facilities within the bluestone building are not attractive to commercial tenants, various not for profits and other deafsector organisations that DCA has had discussions with. Feedback has included ongoing maintenance and refurbishment costs of the bluestone buildings. Deaf Community positive response to Deaf Hub concept plans. Page 10

11 Overview of EY Process and Timeline EY APPOINTED REVIEW OF DCA DOCUMENTATION AND INFORMATION STAKEHOLDER CONSULTATION (DCA Board, DCA Staff, VCD, DEECD and other Victorian Government Departments, not for profit organisations, Deaf sector organisations, 3 rd parties) 1 ST COMMUNITY CONSULTATION RELEASE OF EY INTERIM ADVICE WITH AN OUTLINE OF POTENTIAL OPTIONS (NO EVALUATION) 2ND COMMUNITY CONSULTATION TO DISCUSS POTENTIAL OPTIONS EY ADVICE, REPORT TO DCA & EVALUATION OF OPTIONS Page 11

12 Deaf Community Consultation Based on feedback from the recent community consultation, the deaf community expressed a preference for further consultation and an opportunity to offer views on potential options being considered by the DCA Board. EY has outlined 5 potential options. This is not an exhaustive list of all potential options, and is no indication, representation or direction of any future DCA Board decision. These options have been identified purely for discussion purposes. High-level analysis of potential cost implications for each of the five options has been provided over a 10 year cashflow period. In our final report, comment and evaluation will be made for revenue enhancement and an important range of nonfinancial considerations. Page 12

13 Potential Options for DCA Option 1 - Status Quo Retain ownership of entire Site and upgrade/refurbish bluestone building, which is currently in a state of substantial disrepair. There would be opportunities for revenue enhancement and collaboration on the Site with other not for profit and deaf sector organisations, which has not been quantified at this stage. OPTION 1 Option 2 DCA sells the unencumbered portion of the Site ( the rear car park ) to realise capital which can be invested in the Site (i.e. bluestone building upgrade/refurbish), services and mission related outcomes. OPTION 2 Page 13

14 Potential Options for DCA Option 3 DCA sells the portion of the Site that was subject to the previous Contract of Sale with Wesley College (relates to part of the Site affected by the Queens Caveat) to realise capital which can be invested in the Site (i.e. bluestone building upgrade/refurbish), services and mission related outcomes. This Option also reflects the DCA commitment to a new long term 30 year lease with VCD and a $1.6m capital contribution to VCD for a new primary school. Option 4 DCA sells the western portion of the Site (however retains the bluestone building) to realise capital which can be invested in the Site, services and mission related outcomes. This would be with the existing lease to VCD and DEECD in place. OPTION 3 OPTION 4 Page 14

15 Potential Options for DCA Option 5 - DCA sells the entire property with potential for a leaseback arrangement for continued occupation. This option would be with the existing lease & occupation to VCD and DEECD in place. OPTION 5 The options outlined are broad options only and not an exhaustive list. High-level analysis of the cost implications based on preliminary estimates are outlined on the following pages. Page 15

16 Option 1 Community Acceptance Financial Outcomes (cash and capital) Non-Financial Outcomes (Service, Mission, Community) OPTION 1 The analysis on this page is a high-level estimate of the potential cost and capital implications, and does not consider any enhancement to revenue streams. A whole range of additional factors would need to be considered to assess the merits of this option e.g. level of community acceptance, non-financial implications, the impact on DCA service delivery etc. Timeframes & Implementation Risks / Dependency on other Stakeholders Sense of Place and Importance of Site NPV of Cash Flow - Low Estimate (@ 10%) -$ 11,476,833 NPV of Cash Flow - High Estimate (@ 10%) -$ 16,937,255 The NPV of Cash Flow is the Net Present Value of the future cashflows over a 10 year period and represent high-level indicative estimates only. The future cash flow has been equated to a cash equivalent utilising an annual discount rate of 10%. The assumptions underpinning the NPV estimate will be discussed in workshops on Saturday 10 th May. The cash flow estimates are subject to a validation of the assumptions which is to be undertaken. Page 16

17 Option 2 Community Acceptance Financial Outcomes (cash and capital) Non-Financial Outcomes (Service, Mission, Community) OPTION 2 The analysis on this page is a high-level estimate of the potential cost and capital implications, and does not consider any enhancement to revenue streams. A whole range of additional factors would need to be considered to assess the merits of this option e.g. level of community acceptance, non-financial implications, the impact on DCA service delivery etc. NPV of Cash Flow - High Estimate (@ 10%) $ 6,704,986 NPV of Cash Flow - Low Estimate (@ 10%) $ 5,790,018 Timeframes & Implementation Risks / Dependency on other Stakeholders Sense of Place and Importance of Site The NPV of Cash Flow is the Net Present Value of the future cashflows over a 10 year period and represent high-level indicative estimates only. The future cash flow has been equated to a cash equivalent utilising an annual discount rate of 10%. The assumptions underpinning the NPV estimate will be discussed in workshops on Saturday 10 th May. The cash flow estimates are subject to a validation of the assumptions which is to be undertaken. Page 17

18 Option 3 Community Acceptance Financial Outcomes (cash and capital) Non-Financial Outcomes (Service, Mission, Community) OPTION 3 The analysis on this page is a high-level estimate of the potential cost and capital implications, and does not consider any enhancement to revenue streams. A whole range of additional factors would need to be considered to assess the merits of this option e.g. level of community acceptance, non-financial implications, the impact on DCA service delivery etc. Timeframes & Implementation Risks / Dependency on other Stakeholders Sense of Place and Importance of Site NPV of Cash Flow - High Estimate (@ 10%) $ 7,523,167 NPV of Cash Flow - Low Estimate (@ 10%) $ 6,608,200 The NPV of Cash Flow is the Net Present Value of the future cashflows over a 10 year period and represent high-level indicative estimates only. The future cash flow has been equated to a cash equivalent utilising a range of discount rates as indicated. The assumptions underpinning the NPV estimate will be discussed in workshops on Saturday 10 th May. The cash flow estimates are subject to a validation of the assumptions which is to be undertaken. Page 18

19 Option 4 Community Acceptance Financial Outcomes (cash and capital) Non-Financial Outcomes (Service, Mission, Community) OPTION 4 The analysis on this page is a high-level estimate of the potential cost and capital implications, and does not consider any enhancement to revenue streams. A whole range of additional factors would need to be considered to assess the merits of this option e.g. level of community acceptance, non-financial implications, the impact on DCA service delivery etc. Timeframes & Implementation Risks / Dependency on other Stakeholders Sense of Place and Importance of Site NPV of Cash Flow - Low Estimate (@ 10%) -$ 4,658,651 NPV of Cash Flow - High Estimate (@ 10%) -$ 1,028,164 The NPV of Cash Flow is the Net Present Value of the future cashflows over a 10 year period and represent high-level indicative estimates only. The future cash flow has been equated to a cash equivalent utilising a range of discount rates as indicated. The assumptions underpinning the NPV estimate will be discussed in workshops on Saturday 10 th May. The cash flow estimates are subject to a validation of the assumptions which is to be undertaken. Page 19

20 Option 5 Community Acceptance Financial Outcomes (cash and capital) Non-Financial Outcomes (Service, Mission, Community) OPTION 5 The analysis on this page is a high-level estimate of the potential cost and capital implications, and does not consider any enhancement to revenue streams. A whole range of additional factors would need to be considered to assess the merits of this option e.g. level of community acceptance, non-financial implications, the impact on DCA service delivery etc. Timeframes & Implementation Risks / Dependency on other Stakeholders Sense of Place and Importance of Site Total Cash Flow - Low Estimate (undiscounted) $ 22,500,000 Total Cash Flow - High Estimate (undiscounted) $ 32,500,000 The NPV of Cash Flow is the Net Present Value of the future cashflows over a 10 year period and represent high-level indicative estimates only. The future cash flow has been equated to a cash equivalent utilising a range of discount rates as indicated. The assumptions underpinning the NPV estimate will be discussed in workshops on Saturday 10 th May. The cash flow estimates are subject to a validation of the assumptions which is to be undertaken. Page 20

21 Summary of Options Option 1 Option 2 Option 3 Option 4 Option 5 DCA Retain Ownership of Bluestone DCA Retain Occupation of Bluestone (via ownership) (via ownership) (via ownership) (via ownership) (via potential leaseback) Cash Flow Impact - Dependency on Other Stakeholders Timeframe of Implementation Immediate Short Term Medium / Long Term Medium / Long Term Medium / Long Term Indicative NPV -$11.5m to - $16.9m $5.8m to $6.7m $6.6m to $7.5m -$1.0m to -$4.7m $22.5m to $32.5m Page 21

22 Summary of NPV Ranges 10 Year Cash Flow - NPV Range (Cost / Capital Estimates) Millions $40 $30 $20 $10 $- -$10 Summary of NPV Ranges - Options 1, 2, 3, 4 and 5 OPTION 5 EXISTING CASH RESERVES OPTION 3 OPTION OPTION 4 -$20 OPTION 1 Page 22

23 Evaluation of Options The EY advice and broader DCA decision making process will have had regard to wide range of considerations as part of the evaluation process, which include. Impact on DCA mission related outcomes and strategic aspirations. Improvement and impact of implementation on DCA services. Impact on the DCA community, value to deaf community and overall level of community acceptance (deaf community, hard of hard and broader community stakeholders). Financial implications and financial health of DCA. Non-financial implications. Priority in relation to strategic imperatives: Improved support services to deaf and hard of hearing children and their families. Refurbishment of the bluestone building (internal and/or external) to enable greater utilisation. Broader support for deaf education initiatives across Victoria with a priority on funding transitional programs to assist deaf and hard of hearing school graduates to acquire skills and better employment outcomes. Ensuring that DCA is NDIS ready. Ability to attract and retain investments, DCA partnerships with corporates and Government to refurbish the bluestone building whilst preserving part of the deaf heritage for future generations. Page 23